Populist Economist – Saving Social Security

Many of the essays I have written here have been about a Fair Deal. They also focus on government solutions that are outside the dogma and ideological toolboxes of our two parties. Government can be good when it enforces contracts fairly and sets up an environment where individuals and groups can be enabled to perform. These are not handouts but ideas to unleash Americans who want to have a better life. This essay is about an element of the Fair Deal that needs to be addressed, saving Social Security.

The Democrats do not want to fix Social Security as they thwarted President Bush’s efforts to alter it for the young a decade ago. The Republicans salivate over shifting Social Security money over to the private side to allow large firms to have a new pool of money to manage (increasing assets under management) and spread their expenses out further (generating more profits). It’s rent seeking with government mandated retirement money. Libertarians would just abolish Social Security, and let you use that money as you please.

As tempting as abolishing Social Security may seem, and who would not want that money in their pocket, we must all realize that not everyone is good at planning. There are many decent people who have no money management skills or time horizon capabilities to focus and save for decades out. There is a societal value to having a central program for retirees to allow for dignity in old age.

The populist concern is not just benefits abruptly being cut 25% when the fully funded end date hits in the 2030s, but that this will affect the other 99% disproportionately as they rely on Social Security more than the wealthy. There is also the breakdown in the contract between government and citizen when citizens now anticipate Social Security to be gone when they need it. The danger is that millions are still being taxed for a program they no longer see as sustainable, but have not fully grasped the full effect of those assumptions. When they do, requesting a Fair Deal will turn into burning down the system for a Fair Deal.

There are only a couple ways of adjusting this system: reducing benefits or increasing taxes. We could reduce benefits immediately and raise taxes to the full funding rate and make this work with a shock, but opposed to prior essays, I do not want a shock here. We want the effects of these changes to be gradual and not throw off the flow of the economy. Changes should be small and allow for people to plan and make adjustments to their lives. Changes also need to keep in mind the small businesses owners, self-employed and contract workers who will disproportionately feel the effects to changes in the Social Security payroll tax.

To fully fund the Social Security system, a payroll tax increase of +/-2.5% is needed. If Social Security is not addressed, come 2034 or 2031, depending on estimates, an automatic cut by 25% of the paid benefits will occur. This will quickly become an election cycle issue. While we do not want to fund the SS Trust Fund in perpetuity, we want to have SS enter a level of funding through income flow that maintains the promised benefit level. The SS Trust Fund was set up to handle the pig in a python nature of the Baby Boomer generation. The Trust Fund does not have to exist if we have the proper tax revenue to fund the retiree payments.

Social Security has investigated the effects of changing the retirement age again by just one year, and it covers roughly 20% of the tax revenue shortfall needed. This is one year! Just moving the retirement age up by one year fixes 20% of what we need. Now how or where do we get that extra 2% of payroll taxes to fix Social Security? Let’s just use the same source that saw a 2% payroll tax change and barely noticed: all of America.

In December of 2010, Congress and President Obama were desperate to goose the economy. They solidified the Bush era tax cuts on a permanent basis and for one year the SS payroll taxes were reduced by 2%. You did not remember this amazing boost to your bottom line by this tax cut?!?!?!!? It happened and in one swoop. It was a blip that no one remembers with strong feelings.

Let us raise the payroll tax by 2% but in a slower fashion. For a decade, each year the American payroll tax rate will increase by 0.2%. Because payroll taxes are shared by the employer and employee, this is a 0.1% burden on each half for each year. Considering the low effects of the Obama administration’s one year full 2% payroll tax cut, this will be a slow walk up that all can account for.

This is not sexy nor is it flashy or different from orthodoxy. This simply fixes a big concern for a large swath of Americans who look to the future and do not consider Social Security a part of it. This is pitchfork and torches fuel as many see over 12% of their pay go to something that is going to disappear before they need it. This reduces economic uncertainty, anxiety and even anger and resentment. Liberal pundits that dismiss these concerns as anxiety are dismissing the real problem of people seeing their economic well being deteriorating, their standards of living eroding or the promises their government made disappearing due to poor governance.

Populism often is a back to basics formula of common sense fixes that complex and corrupt institutions have forgotten because there is no payoff to a special interest. This does not send individuals’ money to the stock market to be wiped out in the next crash. There is no payout to a large corporation. There is the small butterfly action of raising the full retirement age by one little year combined with slowly walking up the payroll tax over a decade. It just needs to be done. Whether the American government stays in one piece or devovles into many, this program will need to be addressed.